Crash of 2008Archive
YET another investigation report into a stock market crash has managed to deflect the critical question that plagues the country’s financial markets.
That question is: how do you curb the power of a small group of large stockbrokers to manipulate the market and thereby create the conditions for periodic crashes?
The Securities and Exchange Commission of Pakistan has just completed its report into the crash of 2008, and the subsequent decision to place a floor on all stocks, and claimed that the “main fault lies with the commission”.
The SECP claimed that “the only but severe fault that triggered the 2008 stock market crisis was placing of floor in the Karachi Stock Exchange and the worst part was that it continued for 110 days.” This assessment must be taken with a grain of salt.
It could equally be said that the decision to apply the floor was not a cause as much as a consequence of the crisis. The SECP has blamed the entire crisis on the single decision to place the floor, and attributed that decision to its own leadership at the time. Ascribing what was clearly a structural defect in the country’s capital markets at the time to a single decision made by a small group of people smacks of evasion of deeper responsibility.
The SECP chairman says the investigators found no “concrete evidence” of the influence of brokers within its own decision-making at that time. He also said he does not wish “to waste energies on blame game and trying to see which broker made how much money in the process”.
These are unfortunate statements. The role of big brokers to skew the pitch on which trading takes place has been documented. Any attempt to get at the influence that a small number of brokers have on the regulator and the capital markets would not be “wasted energies”, but a very worthwhile exercise in unearthing the facts that could then inform the subsequent reform process.
One can only hope that the SECP releases the full report quickly so the public can make up its own mind whether or not a thorough effort has been made to get to the facts by the investigators. But going by the narrative released by the SECP thus far, it seems the brokers and the structural defects in the regulatory environment that create the incentives for manipulation are being given a clean chit.
Published in Dawn, August 13th, 2015
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